Beat the Cypriot sinkhole with plastics

Jon D. Markman writes the “Speculations” column for MarketWatch. He is an
investment adviser, money management consultant and best-selling author in
Seattle. Readers are invited to try a free, two-week trial to his daily
Strategic Advantage
newsletter on growth stocks, ETFs and global investing. Markman also publishes
Trader's Advantage on
swing-trading high-beta stocks and options; Gemini 252 on S&P 500 E-mini and
Treasury bond futures timing; and Gemini SGX on gold and silver futures timing.
He is a former MSN Money managing editor; Los Angeles Times financial columnist;
winner of the Gerald Loeb Award for Distinguished Financial Journalism; and
senior investment strategist at a stat arb hedge fund. He is also author of five
books on investing, including most recently an annotated edition of
"Reminiscences of a Stock Operator." His Twitter feed is @jdmarkman.

Global markets were forcibly put on the Mediterranean diet on Monday, which, in addition to a few tablespoons of virgin olive oil, grilled fish and a glass of wine every day apparently now requires the acceptance of direct confiscation of life savings to satisfy your country's sovereign-debt payments.

One presumes that the Cyprus Incident, which seems like a Robert Ludlum novel in the making, will ultimately fade in importance. Just one little floating rockpile off the coast of Syria that serves as the Cayman Islands of the Mideast — who cares, right? But I have a nagging feeling that this could be just the first pebble in a coming landslide because it reminds everyone that there is still a big sovereign-debt crisis in Europe that has been quietly ignored recently yet has not gone away, not even close.

In the meantime, American investors, isolationist as ever, will start to focus on the fact that there are now just three weeks to go before big companies start to report their first-quarter income. This will be a time to determine if the recent run-up in stock prices has been justified. Brokerages are skeptical, it seems, as they have spent the past three months assiduously cutting their earnings expectations. According to FactSet, the Street is currently looking for a 0.6% decline in first-quarter S&P 500 earnings growth. This is down sharply from the 2.4% growth expected at the start of January.

What you need to know is that this is kind of a racket. The more that analysts cut estimates, the easier it is for companies to beat them. No matter how weak earnings in the current quarter turn out to be, if they beat expectations, then shares will move higher. Combine that with pedal-to-the-metal monetary action, and you can see why bulls feel they are in control despite the Cyprus disturbance.

In a condition like this it may pay to focus on smaller companies that are below the radar -- ones that are just doing their thing, out of the spotlight, and thus less likely to be hammered by global events. I have recommended several in this vein over the past few years, such as Triangle CapitalTCAP, +1.91%
in this column in January last year, when the $28 stock was trading at $17.

Let's take a quick look at one that just went public in the middle of last year: Berry PlasticsBERY, +0.68%
a leader in the plastic consumer packaging and engineered materials sectors.

Berry Plastics' roots date back to 1967 in Evansville, Ind., when it was known as Imperial Plastics. It wasn't until 1983, when Jack Berry Sr. purchased the company, that it became Berry Plastics and began to branch out beyond container packaging. Since 1990, the company has acquired over 30 plastics and packaging firms, and expanded its reach to the drink-cup market, closures, bottles, medical packaging, and films offering.

Despite the company changing hands quite a few times since Jack Berry's purchase, it never stopped growing and expanding. Private-equity firm First Atlantic purchased Berry Plastics in 1996, and helped it grow revenue from $60 million to more than $450 million. It was subsequently sold to Goldman Sachs Capital Partners Fund for $840 million before finally being purchased in 2006 by Apollo Group and its partners for $2.25 billion. Yes it is a private-equity success story, for better or worse.

Although the company went public in October 2012, Apollo maintained a 50% ownership stake in the company, which now generates $4.7 billion a year in revenue. Most companies can only dream of having a 15-year run like Berry Plastics has enjoyed.

The company's aggressive acquisition strategy has certainly played a large role in its success, but its focus on research and innovation remains a staple of its culture. The company's headquarters houses a large R&D facility, where engineers utilize the latest design and engineering equipment to recreate actual real world scenarios for the many products it manufactures. This includes over 1,200 active patents and 200 engineers and scientists working on everything from ordinary trash bags to specialized pipeline corrosion protection for the oil and gas industry.

The company is led by chairman and chief executive Dr. Jonathan Rich, who took the reins in 2010. Prior to joining Berry, he held executive positions with Momentive Performance Materials, Goodyear Tire and RubberGT, -1.00%
and General ElectricGE, +1.35%

The firm operates under four divisions: Engineered Materials, Flexible Packaging, Rigid Closed Top, and Rigid Open Top. The Rigid operations contain the largest division with Closed Top at 31% of sales and includes bottles, prescription vials and tubes. It holds the No. 1 or No. 2 market position in 80% of the global sales in this segment.

Engineered Materials represents 28% of sales and is the next-largest division. The client list of this unit is dominated by the industrial and energy sectors, with products such as prevention tapes and plastic can liners. The last division is flexible packaging, which the firm only entered in 2009 after acquiring Pliant Corp. Products include pouches and printable bags for the food, medical, and personal care markets, and the firm is already the No. 1 or No. 2 provider in over 90% of total sales in this segment.

About 40% of the firm’s total revenue is generated from the food-and-beverage industry, followed by industrial (21%), food service (9%), personal care (7%), and health care (6%). As a result, Berry has a very diverse customer base of over 13,000 customers, ranging from global multinationals to small start-ups.

Additionally, the customer base, which includes Wal-Mart
WMT, +1.50%
McDonald's
MCD, -1.86%
Starbucks
SBUX, -0.18%
Procter & Gamble
PG, +0.23%
Bayer, and many other household names, has minimum relative risk since none represent more than 3% of the firm's revenues.

According to analysts at investment research firm Robert Baird, the biggest challenge plastic packagers have historically had is the squeeze on margins when raw-material costs, specifically plastic resin, escalates. But what was once a negative has become a huge advantage for Berry Plastics vs. its international peers.

The recent boom in domestically produced shale gas has resulted in significant cost advantages for local resin producers. More specifically, the costs advantages are found in polyethylene, which is made from natural gas.

So with sector dynamics in its favor, a historical sales growth rate of 25% annually, and a clear market-leadership position, Berry Plastics looks to continue the success it been able to muster for over two decades.

Shares are already up nearly 30% since going public last October. They slowed just a bit in the past couple of weeks, so this may be a good time to start a small position. This time, with any luck, it won't just be the private-equity firms that get to participate in Berry's success.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.